No European Lev. Loan Market Upturn Until 2010

BARCELONA (Reuters) – The spectre of further credit losses is hanging over Europe’s leveraged loan market, which is unlikely to see any significant recovery before the end of 2009, senior bankers and investors said on Thursday.

“It will be 2009 before any modicum of real confidence returns to the market,” a head of European leveraged finance said, speaking off the record at an industry conference in Barcelona.

The European leveraged loan market is a shadow of its former self, with volume of $45.35 billion for the year to date, down 83.5 percent on the same period of last year which showed $275 billion of volume, according to RLPC data.

Average deal sizes have more than halved from $861 billion in 2007 to $374 billion as bankers focus on club deals for larger private equity buyouts and smaller middle market buyout financings.

Bankers expect little to change in terms of dealflow from now until the end of the year but are admitting that these deals are unlikely to make them rich or supply the revenue that they need, and carry additional risks in a declining economy.

While club-style loans are allowing larger private equity sales to be completed, such as the sale of British publishing and events group Informa (INF.L: Quote, Profile, Research, Stock Buzz), arranging banks are having to hold more of the loans on their balance sheet, which is increasing their overall exposure and tying up expensive capital.

Arranging banks which earn arranging fees of 250-300 basis points (bps) are having to pay larger fees of 150-200 bps to participant banks, which is leaving relatively little to be shared with other banks in the senior club.

This increased exposure may also lead to an uncomfortable end to the year and further sales as banks that are already in asset reduction mode try to manage the increasing number of competing demands on their balance sheets.

“Some of the second tier players in the U.S. and Europe may find it more difficult at year end,” a top institutional investor said.


While the market is unlikely to see further bulk portfolio sales of loans, as in the first six months of the year when Europe cleared most of its backlog of 75-80 billion euros ($107.3 billion) of unsold leveraged loans, banks will continue to sell sticky deals to private equity firms in smaller chunks.

“Eighty percent of the bulk sales are behind us now. Private equity buybacks have taken some of the overhang out of the market, but you will see sales of 40-100 million euros to private equity firms,” the head of leveraged finance said.

Banks are trying to solve their revenue problem by selectively opting for sole underwriting positions on strong credits, as Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) did on the buyout financing backing First Reserve’s purchase of CHC Helicopters (FLYa.TO: Quote, Profile, Research, Stock Buzz) (FLI.N: Quote, Profile, Research, Stock Buzz) and JP Morgan (JPM.N: Quote, Profile, Research, Stock Buzz) did on Lion Capital’s buyout of frozen fish manufacturer Foodvest.

Although deals are still getting done, the wholesale originate and distribute model has broken down into a more bespoke market dominated by traditional bank investors as funds continue to sit on the sidelines.

Second tier banks are benefiting from high margins and the new more conservative deal structures.

“We love the new model,” a head of syndication at a European commercial bank said.

The question of economic deterioration and its effect on credit and pricing however remain uppermost in arrangers and investors’ minds in a dysfunctional market as year-end nears.

“The market is uncertain what economic deterioration means for prices, which have adjusted to a certain extent. This is why the markets are sticky and risk is not transferring,” the top fund investor said.

By Tessa Walsh
(Editing by Louise Ireland)